Why is FXCM trying to buy Gain Capital?

This has little to do with ‘regulatory efficiencies’, and a lot more to do with personalities, cash – and China!

One thing that FXCM CEO Drew Niv is known for is being a shrewd acquirer. Other than FXCM’s 2010 acquisition of ODL which didn’t go quite as planned, FXCM has made some smart acquisitions at reasonable prices (Lucid Markets, Foreland Forex and CGI in Japan…), and has equally smartly avoided overbidding for other FX properties — all the while growing FXCM into the world’s leading retail FX brokerage firm (and a member of LeapRate’s Approved List of global regulated FX brokers).

So why then is FXCM trying to buy Gain Capital, spending so much time and effort in trying to acquire its U.S.-based rival, which arguably has a lot more problems than FXCM — a languishing share price, a tough time making money…??? Does FXCM need the hassle of dealing with Gain Capital’s poison pill defense? If it is just a matter of growth and consolidation, why not just quietly buy a privately held FX broker?

After hearing the FXCM conference call and accompanying slideshow, and seeing what all the financial news sites and blogs have had to say, we believe that most folks are missing the real drivers here. This has very little to do with gaining “regulatory efficiencies”, and a lot more to do with bigger-picture factors. Our take on the situation is as follows:

China — All its troubles aside, Gain Capital and the Forex.com brand does fairly well in China, a market which FXCM and many of its leading global competitors have targeted for strategic expansion over the next few years. Before being forcibly shut out of China in the late 2000’s, Gain Capital did about $14 billion a month there, and Chinese volumes have returned to nearly those levels in 2011 and 2012 at Gain.

Cash — Gain Capital is not doing well, but on the other hand it is not really bleeding cash, and has no long term debt. And Gain’s cash holdings (at 2012 year-end) of about $127 million make it an especially attractive takeover target, especially if some or all of the purchase price is paid in stock. FXCM, if successful, will immediately be strengthening its balance sheet by acquiring Gain.

Personalities — Don’t overlook this issue. Drew Niv of FXCM and Glenn Stevens of Gain Capital have been competing head-to-head for years — for clients, institutional partners, acquisitions, attention of stock market investors as both companies went public at the same time… There is surely an element of defeating one’s rival tied up in this offer, although as we summarize below we think the deal does make a lot of sense for both sides.

And our five cents worth — we believe that this transaction DOES indeed make sense for both parties. FXCM will be acquiring a lot of clients and momentum in certain important regions where Gain Capital is strong, at a very reasonable price. It will also be able to cut a lot of costs out of the combined entity — looking at the FXCM presentation on the Gain acquisition, it looks like FXCM plans to basically fire (nearly) everyone at Gain Capital, and move Gain’s customers over to FXCM’s platform. On the other side of the deal, Gain Capital shareholders will be upgraded into a much better situation — a more liquid stock, with greater overall upside prospects and better management, and at a premium to the mid-$4 doldrums where Gain stock has been bouncing around.

Does this deal also make sense to you? Will FXCM ultimately succeed in taking out its rival? Please share your comments with us below.

And stay tuned to LeapRate for more as this unique story unfolds. With the Gain Capital poison pill Shareholder Rights Plan acquisition defense now in place, we expect several twists to unfold before all is said and done.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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